Ordinary people have been using investment trusts to make the most of their money for more than 100 years. These are like unit trusts in that they pool investors’ money and use this cash to invest in a range of shares or other instruments. But unlike unit trusts, investment trusts are limited companies so they have shares which are listed on the Stock Exchange.
When an investment trust is set up it issues a set number of shares to investors. It is therefore known as a closed fund, rather than an open fund like a unit trust. The cash raised from the share issue is then used to buy shares in other companies or property or loan stock. The investment trust manager is a professional fund manager and uses his or her skill to manage the investment trust’s portfolio. An investment trust’s share price is determined by two factors. Like any listed company, supply and demand has an influence. The other determinant is the performance of the trust’s underlying assets.
Market sentiment means it is quite possible for a trust to fall from favour and its shares slip back in value. When the share price is lower than the actual value of the assets in the fund, the fund is said to be trading at a discount. This represents an additional layer of risk for investors but can also provide the potential for higher rewards if a recovery takes place.
Investment trusts tend to perform better than unit trusts – though the risk element is slightly higher. Taking expert advice will help you understand their pros and cons.